Evidence that liquidity is returning to the debt markets is piling up. One indicator, admittedly not very scientific, is that Real Estate Capital has been running two pages of new lending deals instead of one for the past few months.
Another is that only nine months ago £100m was a large ticket for a single lender to underwrite. Times have changed. The talk at MIPIM was of banks and debt funds prepared to ‘take down’ £300m, £400m or even more on their own, confident that the demand for debt has reached a tipping point, with a marked rise in big deals and a growing queue of buyers to syndicate to.
Bank of America Merrill Lynch is talking of using its balance sheet to lend €10bn and distributing 80-90%. It sounds like chest-thumping, except BAML is the bank that last week funded a €935m loan for Lone Star to buy Coeur Défense in Paris.
AXA Real Estate, with Norges Bank IM by its side, says it could lend €600m on a single deal; Goldman Sachs underwrote a €360m loan for an Italian retail portfolio late last year, which it securitised, and it’s one of a string of lenders vying to finance seven Milan office buildings, in a €400m-plus financing. The underbidder on the £550m Telereal Trillium portfolio, sold to Legal & General in the past few weeks, had an agreement to lend £300m from Barclays in his pocket.
None of these banks offer 90% LTVs on almost no margin, although margins are falling. So we’re not back in 2006-07 territory. Borrowers are not keen on returning to those days either. They like the simplicity of going to one, or perhaps two, lenders for very large loans.
But they also want relationships with lenders who understand their business and assets, and they prefer underwriters to hold pieces of their debt to maturity or refinancing, with distribution to only a small pool of other investors. They don’t want to go back to having 10 people hold their debt and not know who to go to for approvals.
Mega deals do not represent the wider market, but debt is also trickling out to smaller, secondary assets. Investors with difficult stock to shift are selling portfolios because buyers can get debt; Bayside (a buyer) and Internos (a seller) are just two examples. A year ago, selling secondary sheds would have have been tough, except one by one, to equity buyers.
Vision brings risk into focus
Whether a return to reckless property lending can be prevented, or at least mitigated is becoming a hot topic.
The Vision report’s authors believe they have some answers. To work, their key proposals would need regulatory force. Now, IPD and CBRE have thrown their hat into the ring with a commercial proposal, based on IPD’s existing portfolio analysis service for pension funds’ portfolios.
Just because their paper is touting for business doesn’t mean it lacks merit. But it’s worth remembering that all the data IPD’s PAS clients have had for 20 years didn’t stop most of them getting caught out in 2007.